Forget About the American Dream

In a 2004 speech to the National Association of Home Builders, President George W. Bush perfectly described the attitude of the day: "For millions of our citizens, the American Dream starts with owning a home."

He went on:

Home ownership gives people a sense of pride and independence and confidence for the future. When you work hard, like you've done, and there are good policies coming out of our nation's capital we're creating a home -- an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property.

And boom went the dynamite. The rest was history.

With the housing bust and millions of foreclosures over the last five years, a predictable trend is taking place: The homeownership rate is plunging.

Homeownership hit 65.4% last month -- the lowest rate in 15 years, according to the Census Bureau. The rate peaked in 2004 at 69%. The average since the bureau started keeping track in the early 1960s is 64.1%. So, we're getting pretty close to normal now.

What's it mean, and why should you care?

Every home is owned by someone, be it the person living there, a landlord, or a bank. Changes in the homeownership rate occur when the balance between those three shift.

During the boom years, a higher portion of families actually owned the roof over their heads. Today, more of those roofs are owned by investors, apartment companies, and banks. According to the National Association of Realtors, investors' share of home sales surged to 64.5% last year to the highest level in seven years. For every 100 homebuyers who intended to live in their homes, 44 bought purely for investment. Half of those investors paid all cash. Their incentive to do so is clear. "During the past year investors have been swooping into the market to take advantage of bargain home prices," NAR's chief economist Lawrence Yun said last month. "Rising rental income easily beat cash sitting in banks as an added inducement." Millions of Americans were foreclosed on, in other words, and deep-pocketed investors are feverishly buying up their homes.

What are the old homeowners doing now? Two big trends tell their story.

One, household formation fell like a rock during the recession as young adults moved in with their parents and existing families "doubled up" in a single home. These aren't small numbers, either. "In 1980, 11 percent of 25-to-34-year-olds were living in multigenerational households. By 2008, 20 percent were," reports TheNew York Times. Household formation fell to just 398,000 in 2009, the lowest in decades and about one-third the trend rate. Rather than opening up their door where they live and saying, "Welcome to my house" as Bush praised years before, they moved into their parents' basement.

Two, renting has become the new cool thing to do. According to the Census Bureau, the nationwide rental vacancy rate is now the lowest it's been in over a decade as former homeowners trade their mortgages for leases. Nationwide apartment rental prices rose 4.4% last year, according to TransUnion -- above the rate of broader inflation. At this rate, HGTV is going to start a show called "Rent Hunters."

Stories are common across the country of potential homebuyers struggling to close deals as they compete with investors buying homes in bulk and renting them out. Given potential returns, you can hardly blame them. In February, Warren Buffett told CNBC, "If I had a way of buying a couple hundred thousand single-family homes ... I would load up on them ... it's a very attractive asset class now."

In fact, in 98 of the 100 largest American cities, it's now cheaper to buy than it is to rent. With millions of Americans either shut out of the mortgage market due to bad credit or disenchanted about homeownership after the crash, home investors who want to become landlords are in the best position they've been in in years. It's the return of that value -- along with a rebound in household formation -- that will drive home construction higher, setting homebuilders like D.R. Horton (NYS: DHI) , Meritage (NYS: MTH) , and MDC (NYS: MDC) up for a much better coming five years than the previous five.

So is the American Dream dead? I think you have to redefine what it is in the first place. Is it owning a home you could never afford and going through foreclosure? No. It never was. The American Dream is being in a strong enough financial position that you and your family have a decent quality of life and a certain amount of security. Millions of Americans are closer to that goal as renters than they ever were as homeowners.

For more on how the recession is impacting the housing market, check out my e-book 50 Years in the Making: The Great Recession and Its Aftermath for your iPad, Kindle, or Nook on Amazon or Barnes & Noble. It's short, packed with information, and costs less than a buck.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.